Spotlight II: VAT Supply splitting avoidance (9 February 2011)

Where a single supplier provides a customer with a package of goods and/or services which if supplied separately would be subject to different rates of VAT then it will be taxed at the VAT rate applicable to the main supply. Supply splitting occurs when the different elements are provided by different business entities creating separate supplies. Our view is that where:

• elements of what would constitute a single supply if made by the same person are supplied by different suppliers
• the customer has no real opportunity to decline to take an element of the package either because of the contractual terms or pricing structure,

the arrangements should be taxed as if a single supply had been made.

Legislation will be introduced in Finance Bill 2011 to counter supply splitting avoidance involving printed matter

The VAT Act will be amended to withdraw zero-rating from printed matter where:

• the supply of printed matter is connected with a supply of services
• the supplies referred to are made by different suppliers

For the purposes of the legislation, a supply of printed matter will be defined to be connected with a supply of services if it is ancillary to that supply, such that, had they been made by the same supplier, the two supplies would have been treated as a single standard rated, reduced rated or exempt supply.

HMRC will continue to take action to counter instances of supply splitting in other areas where 'packages' of goods and services are supplied and the constituent elements are subject to different rates of VAT and where there is evidence of value shifting between the elements to ascribe a higher value to those which are subject to the lower rates of VAT at the expense of those taxed more highly.